By Isha Chaudhary
Public spending has been doing the heavy lifting to meet the ambitious goals envisaged in the National Infrastructure Plan (NIP), while the private-sector investment cycle remains in limbo. Not surprisingly, capital expenditure (capex) of the central government rose 26% on-year in fiscal 2021 despite the pandemic throwing up significant challenges on the revenue side. This focus on capex bodes well for the economy because of its higher multiplier effect compared with revenue expenditure.
Such government spending is expected to continue given that the Union Budget for this fiscal has penciled in a 26% increase in financial support. Capital expenditure of the central government rose 26% on-year to Rs 1.1 lakh crore in the first quarter of fiscal 2022, and 77% compared with the first quarter of fiscal 2020, which was marred by a slowdown in the post-election spend. The spending on four core infrastructure verticals – roads, rail, ports and housing – nearly doubled on-year in the first quarter of fiscal 2022, primarily led by the roads and rail segments.
Roads: Construction of national highways rose to nearly 2,300 km in the first quarter of fiscal 2022 from 1,800 km in the first quarter of fiscal 2021 as awarding of contracts by the Ministry of Road Transport and Highways and the National Highways Authority of India (NHAI) continued to be buoyant. The total award of 2,434 km in the April-July period of this fiscal was 10% lower than the high of 2,702 km in the last fiscal, but 2.4x above the award in the same period in fiscal 2020.
Railways: Spending by the Ministry of Railways also rose 26% on-year in the first quarter of fiscal 2022 and a whopping 58% compared with the first quarter of fiscal 2020 (pre-pandemic levels).
These measures provided good revenue visibility to engineering, procurement and construction (EPC) companies with the order book of the top five road developers increasing 8-10% on-year in the first quarter of fiscal 2022 from the high base (up 22%) of fiscal 2021.
States: The capital expenditure of states also saw a much smaller impact on account of the second pandemic wave. Spending of the top 14 states in India rose 2.2x on-year to `52,000 crore in the first quarter of fiscal 2022 and matched pre-pandemic levels in the first quarter of fiscal 2020. States such as Uttar Pradesh, Madhya Pradesh, Rajasthan, Karnataka and Telangana drove the growth as their spending increased in the first quarter of fiscal 2022 versus the first quarter of fiscal 2020 (pre-pandemic levels).
The Centre’s capex outlay for nine core infrastructure ministries is expected to be up by 20% this fiscal compared with fiscal 2021RE (excluding a one-time loan to the railways which has been classified under capex last year). While the Centre is expected to drive the investment cycle like last year, the capex of states, which was significantly impacted last fiscal, could also pick up pace this fiscal, further goading the investment cycle.
The top 12 states (which account for more than three-fourths of total state capital expenditure) in India have announced capital expenditure growth of 38% in the current fiscal. However, we believe they will potentially achieve 82-85% of the envisaged spend as funds could be diverted towards pandemic management, thereby translating into 12-15% growth for the current fiscal.
Given the limited impact of the second pandemic wave on government spending in the first quarter, we believe the overall growth momentum will continue and aggregate infrastructure capex will rise 16-18% in the current fiscal.
The writer is Director, CRISIL Research